Short Sale or Strategic Default

There are many choices in today’s market of underwater homes, and choosing the right one for you can be a challenge. For example, if you lost a job in your home city but were offered a new job in a different state and your home was underwater (meaning you owe more on the mortgage than your house is worth), you may be confused about whether to continue to make your mortgage payments on time, stop paying all together and let the bank foreclose, or contact your bank and attempt to do a strategic short sale.

Whichever choice you make, it will not be without personal and financial costs. One thing is certain it is prudent to contact a lawyer and other professionals to help make the right decision. In many cases you can receive the advice and support you need at no cost to you.

If you can afford to make payments on your mortgage but you know you have to move and your property is worth less than you owe, you may qualify for a hardship scenario. It may be wise to speak with your bank about doing a strategic short sale. First, you must contact your bank and ask what short sale price the bank would agree to, and then see if that matches what homes are actually selling for in your area.

For example, if the bank says it will accept a $100,000 as the short sale price, and the homes in your

neighborhood are selling for only $75,000, then you might not get the bank’s approval on a decent offer.

There are also a number of factors to consider, however, even with a short sale. First, will you still owe

the bank money after the sale is complete? In most cases this should not be an issue because a good

attorney can get the deficiency waived and there are many programs out there now that require lenders to

forgive any deficiency owed on the mortgage after a short sale. In fact, many lenders know that borrowers

don’t have the money and they are waiving any claim for future money from their borrowers without even

being asked for a waiver of the deficiency.

Second, you must be aware that there are tax consequences when a bank waives a deficiency. The current

tax law treats a waived deficiency as though you earned the money as income, although the IRS is not

making anyone pay taxes on primary home deficiencies through the end of 2012. If you are going to go

for a short sale, you should try to do it fast before the end of 2012.

As for your mortgage, if you can, you should continue to pay your mortgage, particularly if you think

there is a chance to refinance. You could get a renter, which would help you deflect some of the cost.

Also, you may want to buy or rent in your new city before you stop paying your mortgage or do a short

sale, because the credit impact might be less.

The lesson, of course, is that different options exist, and in our area it is crucial to reach out to a New